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Cato Policy Report

Hayek, the End of Communism, and Me

We all have our heroes, and Hayek was, for me, one of the greatest ones. It all started in the 1960s. My country, then Czechoslovakia, experienced at the beginning of the decade an unexpected and, for communist leaders, ideologically unexplainable and indefensible economic recession — the first that had happened in a centrally planned communist country in peacetime. It was something unheard of, something unimaginable. Planning was supposed to guarantee permanent and harmonious economic growth. That surprising and unpleasant experience led even the most dogmatic communist politicians to think about a relatively far-reaching economic reform and to start implementing it. As is well known now, they tried to accomplish an impossible mission, to put into reality “a third way,” this utopian dream of all socialists and progressives, based on a belief in a fuzzy combination of plan and market.

That reform led to the weakening of the planning system and to the increased independence of firms, most of them state owned. It was movement in the right direction. The Soviet politicians and our own hardliners criticized the reform from the left. The Czech economists of my generation (I founded and became president of the Club of Young Economists) criticized the reform from the right, for its evident insufficiency and inconsistency.

At that moment, in the mid-1960s, we discovered the famous dispute about socialism, the so-called socialist calculation debate, between the Austrian economists Ludwig von Mises and F. A. Hayek on one side and the socialists Oskar Lange and Abba P. Lerner on the other, during the 1930s. This debate gave us many powerful arguments about the impossibility of economic calculation under socialism and about the futility of the idea of playing at markets instead of introducing a real market.

It enhanced the doubts we were developing from observing the evident inefficiency of our own economic system. It is a pity that this famous debate is not required reading for contemporary students. The highly regulated and subsidized economies in Europe (and in this country as well) should be discussed in light of Hayek’s arguments.

The real revelation came when we came across Hayek’s article “The Use of Knowledge in Society,” originally published in 1945. You may ask how it was possible to get access to such articles in a totalitarian communist regime. Yet, it was possible.

We scholars couldn’t get our hands on the Wall Street Journal, Newsweek, or Time, but in the libraries of academic institutions we could get the American Economic Review and similar journals. They were sufficiently scientific as to be incomprehensible for the communist censors. Even now, I give this article to my students as the best introduction to rational economic thinking. The impossibility of centralizing dispersed knowledge is one of the most important ideas in economic science, comparable to the classic formulations of Adam Smith.

BRINGING HAYEK TO LIFE IN PRAGUEOur relatively far-reaching, and for that time, unique economic reforms led to significant changes in political life as well. In this respect, we got a lot of inspiration from Hayek’s The Road to Serfdom.

That book was illegally and unofficially translated in my country in the 1960s. It was widely read, and — what is even more important — it was understood as a decisive and final rejection of all kinds of totalitarianism, collectivism, and interventionism and as an authoritative defense of liberty. At least it was understood that way by my generation, which saw its task differently from students in Western Europe and America at that time. We wanted to introduce capitalism, not to destroy it.

Our promising era did not last long. On the morning of August 21, 1968, the armies of the Soviet Union and other Warsaw Pact countries invaded Czechoslovakia and crushed the so-called Prague Spring. That was, paradoxically, the first and only time I saw Hayek.

I happened to attend a conference in the beautiful Austrian ski resort of Alpbach, which was the Austrian, much smaller version of today’s World Economic Forum in Davos. That is where I heard about the brutal occupation of my country and about the collapse of our plans and dreams to get rid of communism. A group of Czechoslovak participants stayed there for the following few days, not knowing what to do. Some of us decided to return home, some decided to emigrate. As an irony of history, the very next day after the invasion, Hayek was scheduled to speak at the conference.

This was in the years between The Constitution of Liberty and Law, Legislation, and Liberty, when his thinking focused on rules and order. So his speech was probably better suited for sophisticated constitutional lawyers than for a young economist from communist Czechoslovakia. I sat down in the auditorium, saw Hayek, heard his voice, but was not able to concentrate on his complicated argumentation. My head was full of thoughts about my occupied country.

It took us 20 long years to finally get rid of communism and of our Soviet oppressors. When this happened, I was, accidentally, again in Austria. The day before the student demonstration in Prague in November 1989 that started our Velvet Revolution, I was giving a lecture at the University of Linz. During my meeting with the economics professors in the afternoon, I asked them about the role of the Austrian School of Economics and of Hayek in the country where he was born and where he spent an important part of his life. Their answer was very depressing: “Hayek is dead in Austria now. He is not on our reading list anymore.”

In the evening, the university organized a panel discussion about the then ongoing reforms in Central and Eastern Europe. Several hundred students attended. In answering one of the questions, I made an unprepared but prophetic statement: “If Hayek is dead in Austria, we will bring him to life in Prague very soon.” Of course, I did not know what would happen in Prague the next evening.

TRANSFORMATION FROM BELOWVery rapidly — in the middle of December, when the first noncommunist government was formed — we started dismantling communism and its institutions. As minister of finance in charge of the transformation of the Czechoslovak economic system, I was — at least I hope — truly Hayekian. My radical reform program was to liberalize, to deregulate, to privatize, and to de-subsidize the economy.

We also understood that Hayek’s concepts of spontaneous order, of dispersed knowledge, of human action versus human design, were relevant not only for the understanding of normal functioning of a free economic and social system, but also for the process of its transformation. It became evident that the transformation of a complex system cannot be organized from above. The long-prepared sophisticated reform blueprints became — practically overnight — irrelevant. Such a transformation process is inevitably a complicated mixture of spontaneity and constructivism, and it must follow the logic of Hayekian evolution rather than the dreams of the always ready to be involved constructivists.

I dare say that we more or less succeeded in our task — more rapidly and with lower costs than the other post-communist countries. The country became a parliamentary democracy and market economy relatively soon. Just as we started that process, Hayek published his last book, The Fatal Conceit, which — I have to admit — I have never found time to read. Communism was a fatal conceit, undoubtedly, but for me, and for many of us, it was already over. “The impossibility of centralizing dispersed knowledge is one of the most important ideas in economic science.”

We were preoccupied with the task of building a different society, and we assumed — correctly or incorrectly — that we knew enough about “the errors of socialism” (which was the subtitle of his book).

I don’t want to say that Hayek is not relevant now. I do believe that he is as important and worth studying as he was in the past. We are again in a world which is based on a new, perhaps only slightly new conceit. Today’s society in Europe, and I am afraid more and more in America as well, is based on a similar error as in the past. Hayek was right in The Road to Serfdom that interventionism is a very unstable system, which inevitably evolves away from a free market economy (and society) into a more and more controlled, regulated, and administered system. This truth should never be forgotten. We should read Hayek again and again.

The economic system in Europe at the beginning of the 21st century is not a free market economy, but a “social-market economy” (soziale Marktwirtschaft) with a very heavy load of environmentalism in it. Such a system is not tenable; it cannot function in the long run at all, and it cannot function efficiently in the short run. Europe’s sluggish economic growth — currently even stagnation, high unemployment, and increasing indebtedness — are the inevitable (and expected) outcomes. The tragic mistake — the attempt to monetarily unify Europe by introducing a common European currency — made it only more visible and more rapidly moving towards the end.

Hayek’s ideas returned to public attention also with the financial and economic crisis at the end of the last decade (which my country survived relatively well). It seems evident that Hayek proved to be more relevant than Keynes in the analysis of the causes of such a crisis. Hayek tells us that a crisis is usually the result of “easy money policy,” of the irresponsible playing with interest rates and of the dream that fiscal policy can substitute for the much needed restructuring of the economy. He would no doubt consider the currently popular “quantitative easing” a pseudo-medicine. Those who do not know it should reread his Prices and Production, published 80 years ago.

Europe needs Hayek and his merciless analysis of the over regulated, controlled, centrally administered European economic system and of the slippery road to serfdom that we have already embarked on. And I hope that American students, too, will come to understand this new “fatal” conceit.

Václav Klaus is a distinguished senior fellow at the Cato Institute. From 1989 to 2013, he served as finance minister, prime minister, and president of Czechoslovakia and the Czech Republic. He helped lead his country out of communism, through a peaceful separation, and into the modern world. A version of this article was delivered at a conference, “Hayek and the Modern World,” at the University of Richmond on April 12, 2013.